Two takes on the electricity crisis

In recent weeks Victorians have seen the remarkable spectacle of their electricity system careering out of control during the first real test of its crisis response abilities since its break up in the mid 1990’s. Then state treasurer Alan Stockdale and his high priced side kick Dr Peter Troughton took the axe to the old SECV saying it was an unmanageable dinosaur laying waste the state through its voracious appetite for debt and penchant for building high cost power stations.

But they replaced a lumbering bureaucracy beholden to no-one with a system that often in the last two weeks has appeared to be composed of constituent parts all pulling in different directions. At times it has been obvious no-one has been in the drivers seat, at times the system has appeared to be at war with itself. Why has this happened?

The Strike

Yallourn Energy shut down its power station in the La Trobe Valley which supplies 20 per cent of the state’s needs on January 11 after a strike and lockout over the negotiation of a new enterprise agreement. It’s desperate times in the valley for both workers and generators. The industry workforce has been slashed by over 10,000 in the face of restructuring. Generating companies, who paid billions too much for big brown coal generators in the euphoria surrounding privatisation, have been suffering losses and capitalising interest since electricity prices collapsed shortly after the sales.

The unions drew a line in the sand saying they would not agree to increasing levels of contract labour in a region were few enough already enjoyed the security of a steady job. Yallourn Energy said it had to have concessions to give it the confidence to spend $500 million on an upgrade.

The Buck Passing

The government, after the shutdown at Yallourn, began by claiming the strike was a federal issue and there was no problem with power supplies. When Steve Bracks returned from the Davos economic conference the tune began to change because until then acting Premier John Thwaites was looking like a startled rabbit.

NEMMCO, which oversees the national electricity market, was warning of blackouts. Bracks said his government had no power to end the strike or intervene in the industry. NEMMCO did not advise the government on possible responses to the situation, saying that was a political decision. On February 2 it became clear that hot weather and power shortages were on their way. Neither NEMMCO or the Government or the power distribution companies issued public warnings.

The Blackouts

On February 3 panic was in the air. The thermometer soared, NEMMCO and the Government called press conferences announcing there would be power cuts that afternoon as the system became overloaded. The distribution businesses gate crashed NEMMCO’s press conference to talk about their plans but did not say where the cuts would take place.

That afternoon there were power cuts across the state with consumers given virtually no warning. Houses, factories and schools lost power. Traffic lights died, chaos rained. The interconnect to NSW ran so hot importing power into Victoria it had to be turned down.

Murphy’s law came into play as that morning Hazelwood power station was also partly incapacitated with breakdowns. In the height of the afternoon’s chaos a generator at Loy Yang A broke down and power stations stopped providing system settling functions necessary to keep the system safe and working. NEMMCO had to ask them to come back in and meanwhile the market cost for these services had jumped.

The Response

The next day (Friday) power restrictions were introduced and the Government once again said it could do nothing about the situation. The Federal Government had the industrial relations responsibility, they said, and as for the power stations, well, they’ve been sold off. The Federal minister responsible, Peter Reith, used the occasion to score some political points against Bracks while NEMMCO said the system had worked well. The distribution businesses said it wasn’t their fault.

The Weekend Over the weekend restrictions were lifted and Steve Bracks decided maybe he could do something. He appointed former Labor figure Neil Pope to broker a solution. The parties talked all weekend. Then the power company, showing what they thought of the process, issued a release saying no agreement had been reached without informing Pope.

Steve Bracks then invoked essential services legislation and ordered power production to begin. Yallourn was slowly brought back on stream and restrictions stayed on place.

Thursday

The following Thursday the temperature hit the high 30’s Yallourn was not fully operational and Bracks brought back restrictions dropped the day before. As a result power usage dropped so sharply there was surplus for Victorian generators to sell back to NSW. NEMMCO didn’t inform Bracks, later saying it had just done its job ensuring the national grid operated properly.

The Response

Steve Bracks was furious claiming NEMMCO hadn’t kept him informed AND Victorians had suffered to benefit NSW where there were no restrictions. NEMMCO said on second thoughts maybe they could have done better and promised to tell Bracks about the power balance in the future if that was the sort of thing he wanted to know.

The Fallout

Steve Bracks is talking about building a new generator to ensure adequate supply. Electricity investors, fearing he will cruel the market even further, say that’s crazy and against the logic of the national market. Bracks is also inquiring into the system and the blackouts.

NEMMCO has said it will improve communications with the government. The distribution businesses have gone to war in a low key way and are seeking to get back some of the losses caused by restrictions and blackouts from hapless consumers or the Government. The federal Industrial Relations Commission is informally helping to settle the dispute. Victorians are confused and shell shocked.

The Problem

We now live with a disaggregated system where no-one has clear powers and responsibility to handle a crisis. Participants are trying to get over this by developing understandings between themselves. Perhaps Steve Bracks’ investigation will bring forward new recommendations for change.

Take Two: Don’t Blame Energy Privatisation

Comment By Stephen Mayne

With Alan Stockdale and Jeff Kennett out of the political game, there has been some remarkable misinformation pedalled about Victoria’s recent power crisis.

Let’s get a few facts straight. The reason Yallourn Energy is trying to cut its employment costs is that it has already defaulted on some of the interest payments on its $1.5 billion debt. Union leaders suggesting PowerGen has been shipping money back to the UK and want to take more are just pushing lies. Victoria’s power generators are financially bleeding because power prices have plunged, savings consumers hundreds of millions of dollars a year.

Why have they plunged? Because there are too many power stations on Australia’s eastern seaboard and the government-owned NSW generators have tried to protect their market share by offering uncommercial contracts. Ironically, it is the NSW unions who have partly brought on the financial crisis through their successful campaign against the Carr government’s plans in 1997 to privatise the power industry.

If NSW had privatised, the whole sector would be more commercial and prices would be higher. A company like Yallourn could have afforded to tolerate some less flexible work arrangements. Instead, Yallourn’s banks are requiring them to slash costs at every turn. The company is believed to have asked for assistance on the IR front from the Kennett and Bracks governments but were rejected by both. So they went it alone, the newly empowered workers walked off the job and we then we had periodic blackouts and power restrictions which have caused Steve Bracks his first political crisis.

While my personal view is that excessive union militancy has caused Australia enormous damage over the years, the workers in the Latrobe Valley are a special case. And they got special treatment from the Kennett government. Victoria’s electricity workforce has been slashed from 26,000 to about 6000 over the past 13 years and the Latrobe Valley has suffered more than most. Tim Colebatch wrote up the economic suffering in the Latrobe Valley in an excellent piece for The Age a few weeks back. He correctly described it as one of the most economically depressed regions in Australia and this is almost entirely due to the downsizing of the power industry workforce.

Dr Peter Troughton, the brilliant but brutal Cockney who masterminded the break up and $29 billion sale of Victoria’s energy sector for Alan Stockdale, agreed with many of the unions arguments. He argued that Latrobe Valley workers should receive a lump sum $25,000 upfront payment on top of their 4 weeks a year payout. This lump sum was to compensate them for the tumbling housing prices in the region and to help displaced workers relocate to Melbourne. While Kennett reduced the public sector payroll from about 260,000 to 160,000 over his seven years, electricity workers were the only ones to receive their superannuation payouts up front, no matter how old they were. Teachers, nurses, train drivers and everyone else had to wait until they were 55. This meant that your typical long serving power station worker was walking out with payouts in excess of $200,000. More than $2 billion in cash was handed over to retrenched power workers since 1988 and this should not be forgotten.

There are a few other myths that need to be dispelled about all this. Independent MP Russell Savage told 3LO’s Jon Faine recently that there were doubts about the reasoning in breaking up the power industry and selling it to foreigners because you lose control. Russell, didn’t we have lots of power disputes in the 70s and 80s when they were state-owned?

Why not let one of the world’s biggest and best private power station operators run Yallourn if they want to pay $2.8 billion for the pleasure. The public servants at the SECV made such a hash of it that Victorian householders are still paying 25 per cent more for their power than they should be. Tell me that it is better having former Labor industry minister David White as the effective SECV chairman. The reason that so many jobs have been lost is that they shouldn’t have been created in the first place if there was a modicum of efficiency in the old SECV. They were not real, productive, meaningful jobs. It was union featherbedding and management incompetence at its worst that was paid for by electricity consumers and taxpayers.

And the idea that breaking up the industry reduces control is also a furphy. If all the power stations had the PowerGen management then all the workers might all have gone out. Because we have five different power station owners in Victoria, the unions morally cannot pull workers out of one site because of problems on another. The control was built into the legislation by Alan Stockdale and then used forcefully by Steve Bracks. He ordered the workers back to work with the risk of big fines hanging over their heads. The workers grudgingly returned to work and Yallourn got fired up again. So would this have happened under Jeff Kennett. My view is no, because he controlled the public debate so well that he would have had every media outlet in the state beating up on the unions. Instead, the Liberal opposition is not saying much and PowerGen only has its stodgy CEO Mike Johnson running out the arguments. ETU boss Dean Mighell is getting a much bigger press and is enjoying the exercise of power and being in the spotlight. The ETU is a left wing union and it is damaging Labor’s right wing Premier. Labor has probably just kissed goodbye to their chances of winning the Benalla by-election because union militancy never goes down well in the bush. The Bracks honeymoon is well and truly over. As many predicted, including Jeff Kennett, it was the unions that caused the first major political problems for Steve Bracks.

Jeff Kennett was the ultimate marketing guy and probably could have given the rhetorical dressing to land the Studio City project as well. These things tend to feed off each other and potential investors often rely on the sentiment of an investment destination. Virgin choosing Brisbane, the power blackouts and now Studio City failing have given Steve Bracks a serious headache. But for people who say the power industry should never have been privatised, I say horsefeathers. Prices are down, disconnections are down and we have $29 billion less debt. The government could easily fund the Studio City venture itself if it chose, just like Jeff Kennett could have comfortably built City Link toll-free with taxpayer’s money and still hung on to the coveted AAA credit rating.